International study evaluates how banks helped long-standing clients during COVID-19 crisis
An international study by Professor Lars Norden of Fundação Getulio Vargas’ Brazilian School of Public and Business Administration (FGV EBAPE), in partnership with Allen Berger of the University of South Carolina, Gregory Udell of Indiana University, Christa Bouwman of Texas A&M University, Raluca Roman of the Federal Reserve Bank of Philadelphia and Teng Wang of the Federal Reserve Board of Governors, identified that banks did not help companies during the deep economic crisis triggered by COVID-19 in 2020.
The paper, titled “Is a Friend in Need a Friend Indeed? How Relationship Borrowers Fare during the Covid-19 Crisis” and published in December 2020, analyzed whether banks extended a helping hand to long-standing clients that needed loans during the COVID-19 crisis to keep their businesses going.
“Our findings suggest that companies may not be able to count on relief from their main banks during rare problematic circumstances or ‘black swan’ events,” says the report.
The researchers identified an exception to this rule with smaller banks, but only to a limited extent. In the long run, this type of practice by banks will drive away profitable clients. The authors also found that banks may lose money due to the higher interest rates they charge their clients.
The complete study is available here.